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Whole Foods Reports 1Q 22 Percent Sales Increase, Describes Future Stock Option Grant Strategy

AUSTIN, Texas -- Whole Foods Market, Inc. yesterday reported a sales surge of 22 percent to $1.37 billion for the 16-week quarter ended Jan. 16.

According to the company, this increase was due to 15 percent weighted average year-over-year square-footage growth and comparable-store sales growth of 11.4 percent. Sales in identical stores (excluding one relocated store and two major store expansions) rose 10.7 percent for the quarter. Net income went up 27 percent to $49.1 million, diluted earnings per share grew 21 percent to $0.73, and Economic Value Added (EVA) increased $3.3 million to $6.9 million.

"Sales grew by 22 percent on top of a 21 percent increase last year, and we produced 21 percent EPS growth on top of a 43 percent increase last year," said Whole Foods chairman, c.e.o., and co-founder John Mackey in a statement. "We are very pleased with our performance this quarter, particularly in light of our difficult year-over-year comparisons; however as we have previously stated, we do not expect to see this same level of year-over-year increases in sales and earnings to continue throughout the year. We continue to expect comparable-store sales increases for the year of 8 percent to 10 percent, and for diluted earnings per share growth to be lower than sales growth, primarily due to the anticipated acceleration in new store openings."

Gross profit increased 18 basis points to 34.7 percent of sales, which was offset by a 19-basis-point rise in direct store expenses to 25.4 percent of sales, leading to store contribution of 9.2 percent of sales. For the 145 stores in the comparable-store base, gross profit rose 66 basis points to 35.1 percent of sales, and direct store expenses increased 16 basis points to 25.1 percent of sales, resulting in an 82-basis-point rise in store contribution to 10.1 percent of sales. General and administrative expenses went up 25 basis points to 3.0 percent of sales.

During the quarter Whole Foods opened three new stores in Hingham, Mass.; Redwood City, Calif.; and Sarasota, Fla., ending the quarter with 166 stores totaling about 5.3 million square feet. The company also recently signed seven new store leases in Lake Oswego, Ore.; Seattle; Novato, Calif.; Scottsdale, Ariz.; Pasadena, Calif.; Annapolis, Md. (a relocation) and Rockville, Md. (also a relocation). At yesterday's conference call Mackey said the company was particularly looking forward to two new store openings: an 80,000-square-foot location in Austin, Texas on March 3 and a 50,000-square-foot market on Union Square in New York on March 17, the retailer's third Manhattan store.

Also during the call Whole Foods execs discussed the company's burgeoning private label program, which was launching over 30 items this month and a minimum of 11 more in March. Offered items will include soups, organic high-fiber cereals and granola, and single-source honey, according to Lee Matecko, v.p. operational finance.

The retailer has set a long-term growth goal of $10 billion in sales by 2010. For the fiscal year, Whole Foods said it continues to expect sales growth of 15 percent to 20 percent, driven by comparable-store sales growth of 8 percent to 10 percent, and weighted average square-footage growth of about 15 percent, based on the opening of 15 to 18 new stores, including four relocations.

The company additionally noted that it would begin expensing stock options in the fourth quarter of fiscal year 2005, in line with the Financial Accounting Standards Board's Statement 123R, finalized in December, which requires all companies to expense share-based payments, including stock options, at fair value. To prevent "overhang" from past option grants from affecting future income statements, Whole Foods said it would begin to accelerate the vesting of all outstanding stock options (excluding options held by the board of directors and the members of the executive team) sometime prior to July 4, 2005, the date the new rules go into effect for the company.

Whole Foods explained that this accelerated vesting of options would create a one-time, mostly noncash charge in the third fiscal quarter of 2005 of about $10 million, consisting of the estimated increase in value to the option holders caused by the acceleration plus accrual of certain payroll taxes that will be due upon exercise of the options. The company added that the actual amount of the expense would vary based on the closing stock price at the date of the acceleration.

The company currently intends to retain its broad-based stock option program, which it believes is important to employee morale and to Whole Foods' unique corporate culture and its success, but the retailer said it would limit the number of shares granted in any one year so that net income dilution from equity-based compensation expense (EBCE) won't exceed 10 percent in the future. The EBCE would ramp up starting in the fourth quarter of fiscal year 2005 until it reaches 10 percent of net income in fiscal year 2010, the company added. EBCE in the fourth quarter of fiscal year 2005 is expected to be about $500,000, consisting primarily of grants to the executive team and the board of directors, since the retailer won't accelerate those options. This estimated expense doesn't affect the company's annual guidance, according to Whole Foods.
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